SK Telecom Co Ltd (SKM) 2013 Q2 法說會逐字稿

(Interpreted) Good afternoon, welcome to the conference call for the Fiscal Year 2013, Second Quarter Earnings Results by SK Telecom. This conference will start with a presentation followed by a Q&A session. And now we begin the conference of the Fiscal Year 2013, Second Quarter Earnings Results by SK Telecom.

(Interpreted) Good afternoon my name is [Young-Gyu Park] the IRO of SK Telecom. Today's conference call will consist of the earnings presentation by our CFO [Seung-Yun Ahn] on the earnings results of Q2 2013 as well as future management plans and strategic direction, followed by a Q&A session. To help deepen your understanding we also have executives from the relevant business units with us today. The conference call will proceed with consecutive interpretation. May we remind you that all the forward looking statements are subject to change depending upon the macroeconomic and market conditions. With that, let me invite our CFO.

(Interpreted) Good afternoon, my name is Seung-Yun Ahn, the CFO of SK Telecom. Let me start with the consolidated financial results for the second quarter. Although there was some impact from the widening customer benefits, such as the unlimited calling price plans, revenue was boosted by the LTE subscriber base expansion and the growth of the corporate B2B solution business, recording KRW4164.2 billion of 1.3% quarter-on-quarter and 3.9% year-on-year.

Operating income climbed 34.8% quarter-on-quarter and 33.2% year-on-year to KRW553.4 billion thanks to our efforts to refrain from costly subscriber acquisition competition, as well as our focus on service centric market leadership to enhance customer value. Net income also picked up 35.2% compared to the previous quarter to KRW467.7 billion boosted by the earnings enhancement of our invested companies including SK Hynix.

Such gains in both the top line and bottom line can be attributed to our endeavors to strengthen tariff and service related customer benefits to expand LTE services enabling high quality data experience and to curb excessive competition among others. SKT will continue to do its upmost to help advance the ICT industry in Korea, by launching world leading services while help shaping a healthy, competitive landscape.

Let me now address our strategic direction and results by business areas. As we usher in the high speed mobile era, we are initiating the data driven changes while shifting the marketing paradigm away from the subsidy race towards product and service orientated focus. SKT's market stabilization efforts are already bearing fruit. The retention subsidy program for handset upgrades by long term customers is taking up over 70% of all the handset changing subscribers. The data refill service and membership limit refill service are welcomed by the market as well. The churn rate for Q2 marked 2.27%. Since the annual churn rate of 2% recorded back in 2006, this is the first time we are maintaining three consecutive quarters of below 2.4% churn rate.

Our initiatives to further upgrade service and product related customer value are still persisting. As part of such efforts TNT price plan and on-net, off-net unlimited calling price plan were introduced first by SK Telecom. In addition the data gift program and the data creating LTE Noot app were launched to help enhance customers' data usage convenience, being well received by the market as a key differentiating point.

In June SKT's world first launching of the LTE-Advanced commercialized services opened the era of the maximum speed of 150 mega-bps. The market responded quite positively resulting in the July and LTE-A subscriber number around 300,000 already. Along with the introduction of the LTE network, the mobile business is tightly knitted to diverse industries such as automotive, medical services, education, corporate business solutions, among others. As the LTE-Advanced service is bringing the high speed mobile network era even closer, more diverse convergence business models based on the mobile connectivity will proliferate at a faster pace.

Already the B2B businesses leveraging the mobile capabilities are rapidly growing. The ageing society is bringing about greater attention to the mobile convergence with the healthcare industry. SKT is already reaping visible results in such growth industries. Supported by its outstanding network quality and solution development capacity, we are achieving quite a bit already.

First in the B2B area the Q2 revenue came in at KRW422.7 billion jumping around 20% year-on-year. Especially in the solutions area, the top line for Q2 posted KRW108.1 billion all going well for the achievement of the annual target of KRW530 billion.

SKT's MyShop service customized for store management solutions has been recognized as the best practice for creative economy for its contribution to the resuscitation of the traditional marketplaces. This service is widening its deployment into large franchises, such as [Gulf Zone]. Also in our building energy management system solution, it is expanding its footprint rapidly beyond the existing clients, such as buildings, hospitals and department stores, into manufacturing sites and resorts among others. The revenue target of the solutions business is KRW1.5 trillion by 2015.

In the healthcare arena, we are achieving meaningful progress in all three major strategic areas. First of all the health management service Health-On was commercialized in March. As for the smart hospital solution, building on the success case of the Bundang Seoul National University Hospital, we plan to expand the solutions to the main [SA new] Hospital and [Portamay] Hospital and others. Also in the diagnosis devices area, the US FDA approved prostate cancer portable diagnostics device FREND PSA plus, developed by NanoEnTek, is about to be launched in the US market.

As mentioned before, B2B solutions business is targeting sales of KRW1.5 trillion by 2015. In addition, growth businesses including healthcare, are projected to generate revenue of KRW1 trillion or more on a yearly basis. In the future, such businesses will not only spearhead the Company's future growth, but also will become an integral part of SK Telecom's enterprise value.

Through the merger with SK M&C, SK Planet's Q2 revenue climbed 34% year-on-year continuing its upward trajectory as a competitive platform. Boosted by the reinforced offline capabilities, the Company is further enhancing its integrated commerce upper hand. The OK Cashbag service is scheduled to be transformed into a new service offering extensive customer benefits and convenience of use during the second half.

In the commerce arena, the GMV or gross merchandise value of the 11th Street for Q2 rose 15% to KRW1.24 trillion. Notably the mobile 11th Street showed an impressive threefold growth compared to the previous year, recording KRW153.4 billion in GMV. In March, an open market named [numara onbir] was launched in Turkey. In just two months since launching, its monthly GMV reached about $10 million with monthly unique visitors of 4 million signaling a stable entry into the market. We are also pursuing collaboration to launch an open market service in Indonesia with its third largest MNO XL Axiata.

Dear investors and analysts, last May more detailed implementation strategy for the achievement of our mid to long term vision and objectives, Vision 2020 was announced under the title of haengbog [donghaeng], which literally means happiness together. By striving for the ultimate customer value of haengbog, which means happiness, we will see to be chosen by more number of customers by embarking on donghaeng, which means togetherness, we will solidify our growth platform on which we will discover new business opportunities and foster them into meaningful businesses.

The haengbog donghaeng plan in conjunction with the Vision 2020 of achieving KRW100 trillion enterprise value by 2020 will help enhance the stakeholder value for all parties including our customers, companies, society at large as well as our shareholders.

Lastly, I ask for your understanding on the fact that the currently ongoing spectrum bidding process limits our ability to make comments about the topic. I would like to express my appreciation once again to all the investors and analysts for your unwavering support for SK Telecom. Thank you.

(Interpreted) Now, Q&A session will begin. (Operator Instructions). The first questions will be provided by Mr. Kim Hue Jae from Daishin Securities. And the next question will be provided by Mr. [Song Jae Yung] from KTB Investment Securities. Mr. Kim Hue Jae, please go ahead with your questions.

(Interpreted) I have the following two sets of questions. First has to do with your ARPU. I was wondering whether you have any plans in the pipeline to introduce dedicated price plans specifically for the LTE-Advanced services? Along with that, could you also share with us your differentiation strategy to further enhance your ARPU going forward through the service enhancement activities, especially for the LTE-A area?

Secondly, could you elaborate further on your future mid to long term strategies in order to differentiate your services in terms of the subscriber base acquisition versus other peers and other types of mid to long term service enhancement strategy?

(Interpreted) As you are well aware, SK Telecom has launched the first ever LTE-Advanced commercialized services, thereby leading the industry worldwide. As you are well aware, as of the 26th of June, we have first commercialized our LTE-Advanced services in a commercialized form in 42 separate metropolitan areas successfully and as of July, at the current juncture, we have expanded the scope to include 34 major cities and also the major university areas throughout the nation in 84 areas particularly.

For your information, we do not currently have any particular dedicated price plans away from the existing LTE services specifically for the LTE-Advanced. I believe that you should interpret this decision to be our commitment to provide better customer benefits for our subscribers going forward and to further enhance our competitiveness through our fundamental services.

Because customers now will be able to enjoy high quality services at lower affordable prices and they will have access to larger amounts of data in the process and, going forward, I believe that our subscribers will have more number of options available to choose from the more high end price plans available. I believe that you could perceive this strategy to be our commitment to create a new type of business model going forward so that we could provide a more convenience of ease environment for data usage for our subscribers overall.

Let me address the second part of your question regarding our overall Company-wide growth strategy in our efforts to further expand the top line growth. As you are well aware, we are very committed to providing very innovative products and services that is more data-centric to our subscribers so that the subscribers could utilize more number of commercializable services available to them, thereby ultimately leading to the top line growth.

Also, we would be focusing on the B2B business as well as the conversions business areas particularly in conjunction with our growth areas including healthcare platform, et cetera. And we will be boldly moving away from the previously existing closed format of the value chain system or the ecosystem in the industry so that we could further expand open collaboration with various parties in the market so that we could further develop new business models and thereby grow in the process.

(Interpreted) The next questions will be presented by Mr. Song Jae Yung from KTB Investment Securities. And the following questions will be presented by Mr. [Yang Jyung-In] from [Hangul] Investment Securities. Mr. Song Jae Yung, please go ahead with your question.

(Interpreted) Yes, I have the following two sets of questions. First has to do with the competitive landscape in the second half. If you look at the recent trend, it is quite positive to witness that the overall churn rate is on a downward trend and I believe that KCC is quite committed to curbing excessive marketing competition. For instance, they have recently applied suspension of new subscriber acquisition on a particular player in the industry recently and I believe that in the MMP arena, LG U Plus is showing some strength as well. So I was wondering what is the view of the SK Telecom's top management? How do you look at the outlook going forward in the second half of this year with regards to the competitive dynamics and in dealing with such market dynamics, what is your strategy to deal with the market changes?

My second question has to do with your recent decision to sell shares or equity of LOEN, your subsidiary, and relatedly could you explain and provide some clarity as to the exact reasons why you decided to sell those shares?

And relatedly, any plans going forward regarding any other second tier subsidiaries including SK Communications? How do you plan to actually treat and handle those companies going forward? Also, what is your overall bigger plan with regards to your SK Planet and other types of non-telecommunications related subsidiaries, any big changes that we should anticipate with regards to your strategy relating to your subsidiaries?

(Interpreted) Let me first address your question regarding our outlook on the second half competitive dynamics and our Company's strategy to deal with it.

First of all, just as the first half of this year, also during the second half, we will be making our utmost efforts to further stabilize the market in the future. However, I believe that it would be partially hinging upon how the competitive dynamics evolve because of our competitors', I guess, commitment to and their willingness to participate in the market stabilization efforts.

However, considering the following factors such as our Company's intention and willingness to lead in the market stabilization efforts and also the fact that the penetration of the LTE subscribers is actually reaching a pretty critical level already and the fact that the government is quite committed to curbing excessive subsidy competition, I do not anticipate overheated competition environment in the second half.

As for the market stabilization trend, I believe that this is a paradigm shift that is taking place in the industry in a structural fashion, therefore, barring any excessive or extraordinary situations. I do not believe that the competitive dynamics will especially worsen into next year either.

As you are well aware, upon launching our LTE-Advanced services we have already acquired about 300,000 subscribers to date. Based on our competitive edge in the LTE-Advanced arena, we will be continuing to pursue marketing activities focusing on our service related competitive edge. Therefore, I feel confident that we will be able to maintain our current leadership without expending excessive expenses with regards to the subsidy matters.

To answer your second part of the question regarding our plans to deal with our subsidiaries including SK Planet, we have with us the head of the finance division of SK Planet and he will be addressing that question for you.

(Interpreted) My name is [Ho-Kai Kim] and I am the Head of the Finance Division of SK Planet. As you have heard already, on the 18th of July this year, SK Planet's BOD meeting was held and we decided to sell about 52.6% of the shares out of the total 67.6% equity holding that we previously had in LOEN Entertainment. And after such decision, we have actually become the second largest shareholder with 15% shareholding following the first major shareholder, Star International (sic - "Invest") Holdings.

This particular decision to sell shares of LOEN this time was a decision made for the following reasons. First of all, to further enable development of LOEN going forward and also to enable and support the global expansion and growth of SK Planet. So therefore this was a strategic decision to select and focus in the future.

Also, this share sale decision actually was the decision to actually emerge as a digital contents platform and also as an integrated platform for both the domestic and global market, as a global platform operator as SK Planet going forward. So this was a strategic decision indeed. But even after the decision to sell the shares of LOEN Entertainment, we will still remain as the second largest shareholder and we will continue to do our best to create synergy between the two companies. Therefore, we do not anticipate any material change in our contents related strategies.

According to the Fair Trade Act of Korea, there is a clause that has an item regarding the restricted act on the second tier subsidiaries by the holding company and that restriction period will end actually in two years' time since the launching of SK Planet which will happen to be the end of September of year 2013.

So in order to address such restricted act related issues, including SK Communications, we will be addressing various options and considering those options related to other subsidiaries and we will come to final decisions then. However, at this particular juncture nothing concrete has been decided yet.

(Interpreted) The next questions will be presented by Mr. Yang Jyung-In from Hangul Investment Securities and the following questions will be presented by Mr. [Edong Sa] from SK Securities. Mr. Yang Jyung-In, please go ahead with your questions.

(Interpreted) I also have the following two questions. If you look at the second quarter ARPU, on a quarter-on-quarter basis you have grown by about 1% but when you compare that against your peers in the industry, the growth rate itself is not as high as some of the competitors. So I would like to know the reasons why?

And in the past you have always maintained the number one position in terms of the ARPU level among all three major MNOs in the country. So do you think that you will still be able to maintain such a position going forward?

Secondly, you've already mentioned that the number of subscribers for LTE-Advanced Services stood at about 300,000 as of July. So do you have any end of the year guidance or target for that number?

(Interpreted) Your first question had to do with our ARPU growth rate potentially being a little bit less than that of our other competitors. As you said, for SK Telecom the second quarter ARPU grew by about 1% on a quarter-on-quarter basis. That speed itself might appear to be a little bit slower than anticipated. If I may cite a couple of reasons for that, I believe that after the launching of the on-net, off-net unlimited voice calling price plan launching, some of the subscribers that tend to overuse the voice calls that -- amount that is allocated to them, have been actually downgrading or affecting the overall ARPU in this regard.

However the speed with which the existing subscribers opt up to actually downgrade to lower price plans is actually slowing down quite a bit. At the same time the newly introduced LTE-Advanced service subscribers are opting for high level, or high end price plans and as such growth rate is actually becoming more pronounced. Therefore by next quarter we believe that the speed of ARPU growth will be recovering further.

As you are well aware, the number of LTE subscribers and their proportion out of the total subscriber base is on the rise. Therefore for SK Telecom I believe that we have even more upside because that proportion happens to be a little bit lower for SK Telecom right now, so we have more room to grow.

As you are well aware, as for SK Telecom I believe that aside from the LTE subscribers we have relatively more loyal subscribers that are still using our 2G and 3G networks. They do contribute quite a bit to our profitability as well. So compared to our other competitors, I think that we have more upside in this regard in terms of the profitability as well.

You also asked about our year-end LTE-Advanced subscriber number target. For your information we do not have any specific number as a target of subscribers for the end of the year, at the moment.

Also as the market is actually shifting towards more of the retention-related marketing activities, I believe that the overall market pie size itself is reducing.

Therefore I believe that we should consider the number of subscribers in the context of the overall market size, as well as various market dynamics as well. However, what I could tell you is that already, as of today, the number of LTE-Advanced subscribers already stands at about 300,000. If you look at the recent trend of new subscriber acquisition and also handset upgrade subscribers, all such new subscribers, about 30% to 40% of them are opting for LTE-Advanced. So at this trend, we could possibly estimate that by the year-end all of the newly acquired, or those customers opting to change their handsets, I believe that the proportion of the LTE-Advanced opting customers will grow further from the current 30% to 40% up to 50% perhaps.

So in conclusion I could say that our Company is very committed to maintaining the trend of market stabilization and at -- in that overall context we would be looking at the LTE-Advanced subscriber number target in the future.

(Interpreted) The next questions will be presented by Mr. Edong Sa from SK Securities. And the following questions will be presented by Mr. Kim Hong Sik from NH Investment & Securities. Mr. Edong Sa, please go ahead with your questions.

(Interpreted) Thank you for the opportunity to ask the questions. I have a question about the operating income or profit of SK Telecom. If you look at the new and others line item, it seems like it has grown by about 48.1% year-on-year, and by 10% quarter-on-quarter. Although the absolute amount that is listed in that line item is rather small, the growth rate is quite significant so I am quite interested to know whether I could get a better breakdown and what particular items contributed to such increase, that would be appreciated? And relatedly could you share with us the profitability or the margin of that particular business?

I have another question. In your opening remarks, you mentioned that by year 2015 you anticipate the revenue of the solutions slash B2B business to be at around KRW1.5 trillion. So how much margin should we actually consider, out of that total revenue number?

(Interpreted) Actually as you have mentioned during the second quarter, if you look at the revenue numbers out of the -- there's a line item called New and Others, the revenue number has actually grown quite a bit.

As you can see, the most notable growth comes from the B2B solutions area. For your information, we have actually selected key business areas including [Smart Store] and also Smart Cloud and [Green and Safety] and [MNM added] payment as well as Smart Work as the five core solutions business areas, so we believe that such B2B solutions business will further contribute to our top line going forward.

For your information, for the entire 2013 as a whole year, we are looking at the B2B revenue of about KRW1.8 trillion. We hope to continue to expand the share of the solutions business out of the total revenue for B2B going forward. So our goal is to actually expand it all the way up to KRW530 billion for the year.

You asked about the margin out of this particular topline number, but at this particular juncture I believe that rather than simply focusing on the margin side, we believe that the revenue growth is more significantly important.

For your information, at this particular moment in the B2B solutions area, the average margin stands at about 10%. I believe that the margin trend going forward will be increasing year-on-year for the next couple of years from the current level.

(Interpreted) The next questions will be presented by Mr. Kim Hong Sik from NH Investment & Securities. And the following questions will be presented by Mr. Sam Min from Morgan Stanley. Mr. Kim Hong Sik, please go ahead with your questions.

(Interpreted) I have the following two questions actually, regarding ARPU that is. During the second quarter, I was wondering how much impact SK Telecom has experienced from the launching of the unlimited voice calling price plans and all the newly acquired LTE subscribers. I'm talking about the new acquisitions, all such numbers. What's the percentage of those new subscribers opting for the unlimited voice calling option?

And also out of the total LTE subscribers how many or what is the trend of those subscribers opting for KRW60,000 or higher price plans? Is that ratio actually going up again? That's my first part of the question.

Secondly, as you are well aware, your second quarter ARPU growth was not that significant but if you recall in the earlier conference calls you've mentioned that anticipating this year's fourth quarter ARPU you said that you could possibly grow the ARPU by 8% on a year-on-year basis. So looking at the recent trend, do you believe that you could still achieve that guidance or target?

(Interpreted) As for the unlimited calling, on-net, off-net, unlimited calling price plans, there are mixed results of options chosen by the subscribers. Some are downgrading and some are upgrading, so it's mixed results. For your information out of the newly acquired LTE subscribers, those opting for the unlimited on-net, off-net voice calling price plans, about 70% to 80% of the newly acquired subscribers are opting for price plans higher thank KRW69,000. However, for your information, if you look at the trend of the recently launched LTE-Advanced service subscribers, those opting for price plans higher than the KRW69,000 happens to be above 95%.

Looking at the recent trend, we believe that the proportion of the high ARPU subscribers out of the total subscriber base is going to continue growing in the future. Because of our efforts and thanks to the industry-wide efforts to focus on the retention based paradigm shift, I believe that reaching the 8% growth of ARPU year-to-date, as I was communicating with you at the beginning of the year, might not be met all the way and we might miss the target slightly.

If you simply compare the number against the fourth quarter of this year, which is the year-end we might actually miss the target slightly. But if you compare the annual average ARPU of the previous year versus fiscal year 2013 I believe that we could anticipate about more than 4% growth on a year-on-year basis. I ask for your understanding in that the subscriber structure or the mixture between the different MNOs in the country happen to be quite differentiated or different. Therefore I don't think that we could compare ARPU numbers apple-to-apples between different MNOs.

(Interpreted) The next questions will be presented by Mr. Sam Min from Morgan Stanley, please go ahead Sir.

Yes, hi, thank you for this opportunity. I was wondering if you can share management's thoughts on current shareholder return policy as well as how this policy can change going forward? I guess the focus is on absolute cash dividends per share versus a payout policy considering now that profitability appears to be improving with falling marketing cost.

Secondly, do you think that at some point in the future your dividend policy can be pegged to consolidated earnings? If you look at your parent net income as well as consolidated net income, the spread appears to be getting wider and it appears that that could only continue going forward. If you can share your thoughts on broader perspective on current shareholder policy to how this can change going forward I would appreciate it? Thank you very much.

(Interpreted) With regards to the shareholder policy of the Company, I believe that we have been consistently communicating with the market the following fact. I believe that it is very critical to strike the right balance between shareholder return, growth of the Company and also a stable and sound financial structure of the Company. At this particular juncture we believe that we have many factors to consider including the ongoing spectrum bidding process as well as the competitive dynamics and also the need to secure enough funding for future growth. So based on such considerations I believe that we need to wisely manage cash management going forward.

As you are well aware we have maintained the current level of the dividend policy since 2007 until the current period. In the future I believe that we will have to closely watch the market dynamics as well as the financial structure of the Company to determine the most optimum dividend policy possible. So at this particular moment I don't think that it would be appropriate for me to communicate with you that there are any major policy changes that are anticipated.

Our current dividend policy is actually basing our dividend amount based on the parent-only financial statements. And in the future you asked whether we have any plans to actually base the dividend policy on the consolidated basis. For instance this year because of the equity method gain arising from the Hynix related earnings' enhancement, our overall consolidated net income has grown. However, I don't think that that means that we should move away from the parent-only method into the consolidated financial statement based dividend policy in the near future.

However, what I could tell you is that if you look at things from the consolidated perspective there are those invested companies that we have equity holdings from SK Telecom. Once SK Telecom receives dividend income from those relevant invested companies, then upon receiving such dividend payment we might actually consider various other options.

(Interpreted) The following questions will be presented by Mr. [Sean Oh] from Merrill Lynch. Please go ahead, Sir.

(Interpreted) I have the following two questions. Your competitors are already publicly disclosing the revenue related to handsets. I believe that SK Telecom according to your SEC filing in the US under the line item digital handsets you have already reported about KRW1 trillion worth of revenue coming from the handset. This is a larger amount even compared to the new and other revenue line items. So I was wondering when do you plan to actually publicly disclose the potential handset related revenue going forward on a quarterly basis? That's my first part of the question.

Secondly, if you look at the consolidated numbers versus the parent-only numbers, if you look at the other revenue item there is a line item that is actually positive under consolidated numbers but then again if you look at the parent-only there is a minus figure. The difference and the gap between the two numbers happens to be about KRW187.6 billion. So could you explain why such a gap exists? And if that number has to do with the account receivables or [has that] factoring receivables in, why are you treating such line items under the operating income section instead of other sections, accounting-wise?

(Interpreted) Unlike our competitors I could remind you that we have a separate entity which is an invested company by SK Telecom that is actually also handling the handset related revenue matters. For your information the company in charge of the handset revenue related business happens to be PSNM and we do need to check the exact numbers with that entity before getting back to you. So after this conference call we will definitely get back to you with the accurate numbers.

And you asked about the difference between the parent-only and the consolidated numbers in terms of the non-operating income item. As you can see if you look at the parent-only line item, it is showing a minus number. I could tell you that it has mainly to do with the valuation loss on the exchangeable bond issued by SK Telecom.

(Interpreted) Currently there are no participants with questions. (Operator Instructions).

(Interpreted) If there are no further questions, now I would like to invite the closing remarks by our CFO.

(Interpreted) Thank you for taking part in today's conference call and to the very end, we will make sure that all your questions and interests are reflected in our efforts to further improve our management. As mentioned earlier, SK Telecom will do its best to lead the paradigm shift towards data-centric era and to stabilize the market with retention focused activities. We will continuously strive to maximize enterprise value as well as shareholder value. And we ask for your continued support and encouragement.

(Interpreted) This concludes the Earnings Call for Q2 2013. Thank you very much.

Portions of this transcript that are marked (Interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.